The local.xml that can found in the app/etc/ folder of your Magento installation. It contains the database connection details to your store and the encryption key used to secure data. If a nefarious individual laid his hands on this, he/she would have everything they could want.
With the results from the upcoming eCommerce survey (soon to be released), I did some investigating and found that 156 out of 8082 Magento sites had publicly accessible app/etc/local.xml. That's a whole load of customer data that people could run off with.
Once I'd sneaked in and set myself up with some cushty voucher codes (lol jk), I emailed every single one of these sites to let them know. Now I'm writing this as a reminder to all those with a Magento store, who have built a Magento store, or know someone who has got one. Please double check and get yourself secured. Talk to your developer or host if you're not sure.
Is your app/etc/local.xml visible?
To check whether you have an issue visit this URL in your browser:
If you see a page of XML, then you have a problem.
How to solve it?
Now, if you're not sure, you probably should be getting someone else in. Otherwise...
If you are using Apache, there is a .htaccess file in the app/ folder that should be restricting the display of this file. If this isn't taking effect, then it's likely that your Apache server hasn't got AllowOverrides enabled for this directory.